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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Why is EBIT generally considered independent of financial leverage? Why might EBIT actually be affected by financial leverage-at high debt levels?

Summary Introduction

To explain: The reasons to consider EBIT independent of financial leverage and the effects on EBIT at high debt level.

Introduction:

Earnings before Interest and Tax (EBIT):

It refers to the income before the payment of interest and tax. These are the earnings left after the operating expenses of the firm.

Explanation
  • EBIT is independent of financial leverage as EBIT is an operating income before interest and tax.
  • At a high debt level, EBIT will be affected as the interest on debt is paid out of EBIT, therefore sufficient EBIT is required to pay the interest on debt...

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